Which of the following best describes an example of a contingent liability?

A contingent liability refers to a potential obligation that may arise from past events, the existence of which will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events. This means that it is not a current obligation but rather a possible one depending on future outcomes.

A product warranty serves as a classic example of a contingent liability because it represents a commitment that may require future payments or service obligations, depending on whether a product proves to be defective over time. The company is obligated to replace or repair the product if these defects occur, but this obligation is contingent on the actual failure of the product, which is uncertain until it happens.

In contrast, an unpaid invoice, a bank loan, and a guaranteed rental agreement represent present obligations that are not dependent on future events. An unpaid invoice is a direct liability because payment is due immediately. A bank loan requires the borrower to repay the borrowed amounts according to the loan terms. Similarly, a guaranteed rental agreement entails a binding obligation that must be honored regardless of future events. Therefore, only the product warranty fits the definition of a contingent liability, as it reflects a potential obligation that relies on uncertain future occurrences.